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The Elasticity of Taxable Income in the Presence of Intertemporal Income Shifting

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  • Aspen Gorry
  • R. Glenn Hubbard
  • Aparna Mathur

Abstract

Knowing the elasticity of taxable income (ETI) is crucial for understanding the effects of taxation on taxpayer behavior and consequently on tax revenues. Previous research finds that high-income individuals are the most sensitive to tax policy changes. However, these individuals have more opportunities to defer income to future tax bases by altering the composition of their compensation than lower-income individuals. This paper considers the taxable income elasticity when individuals can shift income across tax bases and thereby defer taxation. We decompose the elasticity of taxable income into a real response as well as an income shifting response. We measure the tax rate on deferred income by the expected tax gain from deferring income using stock options as developed by Hall and Liebman (2000). Our results demonstrate that income shifting is an important component of previous estimates of the ETI. Because shifted income is taxed at future dates, income shifting decreases the welfare loss from personal income taxation associated with previous estimates.

Suggested Citation

  • Aspen Gorry & R. Glenn Hubbard & Aparna Mathur, 2018. "The Elasticity of Taxable Income in the Presence of Intertemporal Income Shifting," NBER Working Papers 24531, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24531
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    References listed on IDEAS

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    1. Claus Thustrup Kreiner & Søren Leth-Petersen & Peer Ebbesen Skov, 2016. "Tax Reforms and Intertemporal Shifting of Wage Income: Evidence from Danish Monthly Payroll Records," American Economic Journal: Economic Policy, American Economic Association, vol. 8(3), pages 233-257, August.
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    Cited by:

    1. Helen Miller & Thomas Pope & Kate Smith, 2024. "Intertemporal Income Shifting and the Taxation of Business Owner-Managers," The Review of Economics and Statistics, MIT Press, vol. 106(1), pages 184-201, January.

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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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